Math Problem Statement

If $12,000 had been invested in a certain investment fund on September 30, 2008, it would have been worth $56,946.68 on September 30, 2018. What interest rate, compounded annually, did this investment earn? (Round your answer to two decimal places.)

Solution

We are given that an initial investment of $12,000 grew to $56,946.68 over 10 years, and we need to find the annual interest rate, assuming the investment is compounded annually.

The formula for compound interest is:

A=P(1+r)tA = P(1 + r)^t

Where:

  • AA is the final amount (56,946.68),
  • PP is the principal or initial amount (12,000),
  • rr is the annual interest rate (the unknown),
  • tt is the time in years (10 years).

Substitute the values into the formula:

56,946.68=12,000(1+r)1056,946.68 = 12,000(1 + r)^{10}

Now, solve for rr:

56,946.6812,000=(1+r)10\frac{56,946.68}{12,000} = (1 + r)^{10}

4.74555667=(1+r)104.74555667 = (1 + r)^{10}

Now take the 10th root of both sides:

(1+r)=4.7455566710(1 + r) = \sqrt[10]{4.74555667}

Finally, subtract 1 to isolate rr:

r=4.74555667101r = \sqrt[10]{4.74555667} - 1

Let me calculate that.The annual interest rate, compounded annually, is approximately 16.85%.

Would you like more details or further explanation?

Here are 5 related questions for further exploration:

  1. What would the investment have been worth after 15 years at the same interest rate?
  2. How does the formula for compound interest change if interest is compounded monthly instead of annually?
  3. What is the future value of an investment of $20,000 after 10 years at a 16.85% annual interest rate?
  4. How long would it take for an investment of $12,000 to double at a 16.85% annual interest rate?
  5. What would the interest rate be if the same investment grew to $100,000 in 10 years?

Tip: For a quick estimate of doubling time at a constant interest rate, you can use the "Rule of 72", which approximates the doubling time by dividing 72 by the annual interest rate.

Ask a new question for Free

By Image

Drop file here or Click Here to upload

Math Problem Analysis

Mathematical Concepts

Algebra
Compound Interest
Exponentiation

Formulas

Compound interest formula: A = P(1 + r)^t

Theorems

-

Suitable Grade Level

Grades 9-12